Global equity markets continued to make gains over the week. The MSCI AC World Index rose 0.6% in local currency terms and 1.2% in sterling terms. Japan was the best performing market in local currency terms (1.6%) as equities rallied on the back of expectations for a win for Prime Minister Shinzo Abe’s ruling coalition party in the upcoming snap elections. A weaker yen, which benefits exporters’ stocks, also supported the market. The US was the best performing market in sterling terms (1.8%) as the dollar strengthened on the hopes of tax reform after the US Senate passed a budget vote. The UK was the worst performing market both in local currency and sterling terms with a return of -0.3%.

UK gilt yields fell across all maturities. The 10 year UK gilt yield fell by 3bps to 1.37% and the 20 year UK gilt yield fell by 2bps to 1.91% in a week which saw UK inflation touching a 5-year high. The 10 year US treasury yield rose by 10bps to 2.38% as the US Federal Reserve’s Beige book and tax reform developments indicated continued economic growth. German bund yields rose by 5bps to 0.45% and French government bond yields rose by 4bps to 0.71%. Spanish bond yields rose by 6bps to 1.66% as political uncertainty continued after Spain’s top court ruled the Catalonia independence referendum illegal and the Spanish government threatened to put Catalonia under direct rule.

UK real yields rose over the week. Both the 20 year real yields and the Over 5 year real yield rose by 4bps to end the week at -1.55% each. 20 year breakeven inflation fell by 7bps to 3.37%.

The US high yield bond spread over US treasury yields fell by 18bps to 342bps. The spread of USD denominated EM debt over US treasury yields finished the week 7bps lower at 280bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was unchanged at 103bps.

The S&P GSCI fell by 0.1% in USD terms over the week. The energy sector rose by 0.6% as the price of Brent crude oil increased by 1.0% to $58/BBL. Industrial metals fell by 0.2% although copper prices increased by 0.9% to $6,922/MT. Agricultural prices fell by 2.3% and gold prices fell by 1.3% to $1,282/ounce.

Sterling depreciated against major currencies (except for the yen) over the week after comments from new Monetary Policy Committee members raised uncertainty over a rate rise by the Bank of England. The US dollar appreciated by 0.9% against sterling, ending the week at $1.32/£. The euro strengthened by 0.5% against sterling, finishing the week at €1.12/£. The Japanese yen depreciated by 1.3% against the US dollar, ending the week at ¥113.43/$.

ECONOMIC RELEASES

The US industrial sector met expectations and staged a partial recovery over September with production increasing by 0.3% following August's upwardly revised 0.7% decline. There were also positives coming from the manufacturing sector as both the Empire Manufacturing Index and the Philadelphia Federal Reserve Business Outlook index surpassed analyst forecasts and rose in October to 30.2 (from 24.4) and 27.9 (from 23.8) respectively. The effects of the hurricane season were still visible in September's housing market data; the number of housing starts over September fell by 4.7%, well below consensus estimates of a milder 0.4% decline and August's 0.2% fall. Finally, initial jobless claims fell back to a multi-decade low of 222k, from 244k and below analysts’ predicted level of 240k.

UK consumer price inflation for September was in line with market expectations, moving from 2.9% previously to 3.0% over the year to September; it’s highest rate for more than five years. The increase was largely driven by higher transport and food prices. Retail sales (ex. auto-fuel) fell more than expected, by 0.7% over September against expectations of a 0.2% decrease, and 1.6% year-on-year versus 2.2% expected. The August unemployment rate was in line with forecasts and unchanged from July's figure of 4.3%; a 42-year record low. Meanwhile, average weekly earnings grew slightly higher than expected at 2.2% for the year. September's claimant count rate remained at 2.3%, while the change in jobless claims was higher than previously, increasing by 1.7k from the prior 0.2k decrease.

Germany’s ZEW October survey of the current economic climate came in slightly lower than expected at 87.0; versus a predicted reading of 88.5. The equivalent ZEW survey for measuring expectations came in at 17.6 against expectations of a 3 point increase to 20.0. The October Eurozone ZEW survey for expectations weakened again from 31.7 in September to 26.7. The Eurozone’s trade balance surplus shrank in August, as the stronger euro supported healthy demand for imports, though this was partly offset by a rise in exports.

In Japan, final industrial production growth for August was revised down to 2.0% from 2.1%. The trade surplus rose to ¥670.2bn in September from a revised surplus of ¥112.6bn in the previous month, beating expectations of ¥556.8bn. Both export and import growth slowed as exports rose by 14.1% over the year to September while imports rose by 12.0%. Both missed analyst forecasts of 15.0% and 14.7% growth, respectively.

In a week when China's 19th Party Congress opened, economic releases provided no surprises. Year-on-year GDP growth matched forecasts, slowing slightly to 6.8% from 6.9% while the Governor of the People's Bank of China stated the economy is likely to grow by 7.0% in the second half of 2017 largely due to surging household spending. Annual consumer price inflation also slowed in September with prices rising by 1.6% over the year; down from 1.9%. The pace of growth in the industrial sector quickened as industrial production increased by 6.6% in the year to September, up from 6.0%. Retail sales growth edged slightly higher from 10.1% to 10.3% over the year.

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